U.K. Consultant: Pensions Not Sufficiently Worried About Cash Flow

One of the world’s largest defined benefit schemes may not be paying sufficient attention to cash flows, according to a new survey, raising concerns among consultants that such schemes may not consider how short-term cash flow decisions can affect their investment strategies.

According to a new survey from Hymans Robertson — one of the U.K.’s largest investment consultants, which works for many local government pension schemes — some 40 percent of advisers to local authority funds in the U.K. Local Government Pension Scheme think schemes’ net cash flow positions are not being regularly discussed at committee meetings, while another ten percent think cash flow positions are “rarely discussed.” The poll was conducted among 19 independent advisers, who represent more than half of LGPS funds by assets.

The LGPS is one of the largest defined benefit schemes in the world, with around five million members and assets of more than £217 billion ($285 billion), according to the Pensions and Lifetime Savings Association. It is locally administered by 101 pension authorities. 

The cash flow issue has become increasingly significant at U.K. pensions, which face declining pension contributions at the same time that yields and bonds are falling, making it harder to maintain adequate cash flows to meet near-term liabilities, according to a recent UBS report. The Hymans Robertson findings come a year after trade union Unison warned in a publication that “many funds are cash flow negative,” with “not enough coming in to pay pensions.” 

[II Deep Dive: Mercer: Majority of European Pensions Now See Cash Flow Deficits]

Colin Meech, national officer for trade union Unison and a member of the Local Government Pension Scheme Advisory Board, nevertheless took exception to the Hymans Robertson findings. He explains that last year, there was “an enormous leap in cash flow demands for lump sum payments” owing to mass layoffs at local authorities, where around 750,000 jobs had been cut, leading to “an exceptional position.”

Meech dismissed the research by Hymans Robertson as “not an official survey of the governing body of the LGPS,” stating that “Hymans Robertson have no function in the management of the LGPS.” 

Ben Gold, head of Pension Investment at Xafinity, a rival consultancy, says there is validity in the report’s findings.

“Looking at what LGPS schemes are doing, from a cash flow perspective, is valuable,” he tells  Institutional Investor. “I find it very surprising that 100 percent of schemes are not considering this at every trustee meeting. 60 percent seems very low and suggests to me that the attention might not be being focused in the right places.”

Meech said that the LGPS is undertaking a sizable cost transparency project that will allow funds to judge the net performance of their investments.  From this, he said, funds would be able to “make adjustments to their cash flow.”

The Hymans Robertson report conceded that cash flow negativity was “nowhere near” the same issue as it was for private-sector pension schemes, while Xafinity’s Gold underscored the importance of scrutinizing cash flow even in cash flow positive schemes.

The report’s authors — William Marshall, head of LGPS investment clients, and David Walker, head of LGPS investment — wrote that they were “slightly surprised” by the findings, adding that “it is important that funds have an understanding of their cash flow position and the approaches that will be used to meet cash flow requirements.” The authors added, however, that they “appreciate much of the cash flow management may be taking place outside of the normal meeting cycle.”

Marshall and Walker added that funds should consider the “potential implications of switching to a more income-focused investment strategy” on “future expected returns.”